Next week  many of the reforms proposed in the Jackson Report of 2010 will be implemented by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”).  LASPO is expected to have a substantial impact upon litigation costs and, consequently, the way litigation is paid for. There are a number of implications for the litigation industry which need to be considered.

Contractual arrangements

For the first time, from a Third Party funding (TPF)  perspective, a solicitor is at liberty to enter into a contractual arrangement with a  client that entitles him to a proportion of his client’s damages in return for the solicitor postponing and/or discounting his fees during the case. Such contractual arrangements are to be known as damages-based agreements (“DBA”).

This method of funding litigation bears more than a passing resemblance to the US contingency fee model and is probably what comes to mind when someone says “no win, no fee”. The introduction of DBAs is intended to provide an additional avenue for claimants to obtain funding and, thereby, increase access to justice in England & Wales.

Opportunity not a threat

Whilst it remains to be seen what impact DBAs will have on TPF,  the general consensus amongst TPF providers is that the introduction of DBAs represents an opportunity, rather than a threat, to their businesses. Whilst on the face of it DBAs allow solicitors to compete with TPF providers, only a handful of the biggest law firms have sufficient financial resources to undertake DBA cases. It is common knowledge that over the last decade the great majority of law firms have seen profit margins squeezed to the point where they are reliant upon regular income for working capital and cannot afford to see fees locked up for several years in claims being run on DBAs.

Building a portfolio

In a post-LASPO world it will still be possible for TPF providers to continue funding claims on the traditional “case by case” basis (and they will no doubt continue to do so), but, in addition, more sophisticated TPF providers are looking to fund portfolios of DBAs through reputable law firms. The benefits of such arrangements are obvious for all concerned: cash flow - the law firms will benefit from predictable and frequent income, risk mitigation - the funders can spread risk across the portfolio of cases, and simplicity - the clients need not enter into separate contractual arrangements with the funders.

A slow uptake

The speed of uptake for DBAs is difficult to predict, but many commentators believe it will be slow for a number of reasons.  Firstly, solicitors are accustomed to assessing claims on their legal merits, but too few are adept at also determining the commercial merits, which DBAs will require. Learning to assess cases on a legal and commercial basis is likely to involve substantial shifts in attitude and culture within law firms.

Secondly there will be an inevitable period of uncertainty following the 1st April and solicitors will be reluctant to step into the unknown and untested territory, particularly when getting it wrong (i.e. losing a DBA case or entering into an unenforceable DBA) could be incredibly costly. History shows us that change to the legal landscape on this scale is often slow to be fully understood and accepted.

Furthermore, DBAs introduce solicitors to the possibility of obtaining substantial financial returns far in excess of anything that was available to them previously.  However, DBAs are not replacing the existing conditional fee agreements (“CFA”) regime.  Under a CFA the solicitor agrees to postpone and discount his costs and is only paid if the case is successful, but rather than being paid a “success fee” from his client’s damages he is paid an uplift on his postponed and discounted fees from the opponent and that uplift is capped at 100% of the costs. 

Clearly there will be circumstances in which a DBA is financially more advantageous to a solicitor than a CFA, but this will not always be in his client’s best interests. The dual DBA/CFA regime undoubtedly leads to a conflict, or at least some tension, between the use of DBAs versus CFAs and the solicitors’ age old duty to act in his client’s best interests.

‘After the event’  no longer recoverable

Another key change under LASPO is that successful claimants will no longer be able to recover the premiums they pay for after the event insurance from their opponents. This change will inevitably cause claimants to consider more closely the financial benefit of having such insurance in place. In response to greater scrutiny on the pricing of premiums, the after the event insurance providers are likely to have no choice but to reduce the cost of such insurance or see a dramatic reduction in the number of policies they issue. TPF providers will also have to appreciate the impact that the inability to recover the premium from the opponent has on the overall claim proceeds from which to take their returns.

Costs budgeting

Finally, LASPO will see the introduction of a “costs budgeting” regime that will require solicitors to state to the court very early on in the litigation what they expect their clients’ costs to be. Should the solicitors exceed that budget without good reason or if they fail to put their opponent on notice that the budget is likely to be exceeded they will struggle to recover the overrun even if their clients are successful in the claim. From a TPF provider’s perspective this is a welcome development because it reduces the risk of being called upon late in a funded claim to “top-up” the funding where the solicitors have exceeded the original budget.

The summary above is by no means an exhaustive list of the wide ranging and far reaching implications of LASPO, but represents some headline points for the TPF industry.

Matthew Reach is a  litigation funding solicitor at  Argentum. [email protected]